Tag Archives: Euro

Trade Leader Alex Kazmarck of SpotEuro presents analysis of the EUR/USD:

Update

The euro remained elevated above the 1.3900 level following the Crimean referendum and sanctions imposed by the US on the Russian political and business people closely connected to the Russian government. While most of this was expected, I think the market reacted positively mostly due to the fact Russia did not invade Eastern Ukraine, where people have been rallying against the newly formed Ukrainian government. I anticipate neither the Russians nor the American/EU leaders settling on this issue for some time so I think it’s worth paying close attention to what occurs as the market will be ready to react negatively on any news of a Russian invasion or annexation of Eastern Ukraine.

Technicals and Fundamentals

While the EUR/USD pair was able to break and close above the 1.3900 level, it has failed to gain momentum, mostly due to a risk-off environment centered on the geo-political conflict in Ukraine. Any positive solution should open more room to the upside and a break of 1.40 will most likely give the bulls a clear run for 1.42-1.45 levels. ECB President Draghi has been on the wires last week curtailing the euro’s upside since the stronger euro make it more difficult to stimulate inflation. There are plenty of risks that remain, including China’s slowdown and its shadow banking system which is beginning to show its cracks with the string of corporate bankruptcy filings over the last few weeks.

Currently trading at 1.3925, a 38% retracement of the latest leg higher that started on the 3rd of February brings us to support at 1.3800. A deeper retracement below 1.3700 could be a stronger sign of momentum waning and I would expect a correction back towards the supporting trend line of 1.3500 (from Summer of 2012 lows extending to the lows set at the end of January and early February of 2014).

Guidance

There are several factors that are relevant to EUR/USD price action in the near term: ECB and Draghi’s stance on the higher euro, the Ukrainian conflict and the level of uncertainty involved, and the Fed’s tapering of the QE program. The latter has been priced in with expectations of taper to continue and Draghi’s content on verbally intervening when the euro pushes into the 1.40 figure. Economic data will be important to watch for signs of inflation as the latest EU data could be a one-off. Worse economic data will push for more action from the ECB and the Fed may possibly surprise the market with a pause to get a reading of consistency within the US recovery.  There is a lot to process so guidance from these events will be crucial for the next push.

Short term resistance – 1.1.3970-1.400

Short term support – 1.3830-1.3900

In the first of many posts, Alex Kazmarck of Currensee Trade Leader SpotEuro presents his analysis of of the EUR/USD. Tune in tomorrow for John Forman's take on some of the same events.

Fundamental:

The last two weeks have been a disaster for the euro currency as economic data from Germany and France along with Italy, Spain, and Portugal continued to underperform expectations, culminating with the ECB lowering interest rates by .25%, a move that was not expected by most economists. These developments over the past ten days have led to the euro losing 3.2% of its value against its US counterpart. The 1.3825 high in the pair’s exchange rate may now be in place, unlikely to be revisited anytime soon. Although US economic data has been mixed, the recent surprise in GDP growth and better than expected payrolls data is pointing to a fundamental shift between the ECB and the Fed, with the latter looking to tighten its monetary policy (tapering of QE) sooner rather than later.  This shift will most likely lead to a continued correction for the euro in the coming months.

There remain many obstacles for both the euro area and the United States, both suffering from poor employment and deflationary pressures. As mentioned many times by the FOMC members, the Fed is targeting a jobless rate of 6.5% before it begins to increase interest rates. While that figure has been on the decline, the participation rate has fallen to lows not seen since 1978, making it difficult to see the impact QE has had on job creation. This creates a problem in forecasting what actions the FOMC will take in the coming months and is just one example that could easily reverse market direction.

Inflation and employment will most likely be difficult to gauge, so aside from recognizing their importance, we will look at price action for guidance.

Technical:

The EUR/USD found support just below 1.2800 during the latter part of 2012 and the first half of 2013, bouncing off the figure in late July and rallying 8% to set a new year high.  As we can see in the following chart, the pair retraced its first rally by 50% before continuing higher in September through the end of October. With the most recent price action being fundamental in nature, we are using this as a stepping stone to look for further downside. The weekly trend line was broken at 1.3450, which was previous support and will now act as resistance. The next level of support is now just above the 1.3150 level for the pair. While a retracement back above 1.3500 can’t be ruled out, I’m looking to sell on rallies and a break below 1.3100 should confirm the medium-term short bias. Further below is the important 1.2800 level that acted as support for 2012-2013. Should we break that figure, it will act as confirmation of a longer-term short bias and I’ll be looking for lower 1.20s as a target before looking for longer term consolidation.

Outlook:

Near term outlook is for a small correction to 1.3450/1.35 before a continued move lower to 1.3100 near the end of the week/month. There is a lack of economic data from Europe until Thursday at which time we’ll see preliminary GDP readings from France, Italy, and Germany, along with other data. Worse than expected figures will put downward pressure on the euro and support the loose monetary policy guidance shown by the ECB last week.

Looks like the euro is about ready to do something interesting. After not really going anywhere for much of the year, the single currency looks poised to develop a trend move in the not too distant future.

Evidence for this comes from the narrowness of the Bollinger Bands. Exhibit A is EUR/USD where we can see on the weekly chart below that the Bands - as indicated by the lower plot - have reached there narrowest in several years.

Exhibit B is EUR/JPY. The Bands here are not quite so relatively narrow as is the case above, but they are certainly narrow enough to start getting us thinking about looking for a break from the recent consolidation which developed following the lengthy uptrend earlier in the year. You’ll recall that move was largely motivated by a weakening yen rather than anything noteworthy on the part of the euro.

Exhibit C is EUR/GBP. Here again we have the Bands at or near their narrowest for a number of years thanks to the consolidation which developed starting in March. Here too we see an uptrend in the cross prior to the ranging period which was driven by non-euro factors as it was the pound weakening during Q1 which motivated the move higher.

The one pair where the case is different is EUR/AUD. That cross has been in a steep uptrend since the middle of Q2. That, though, has everything to do with weakening in the Aussie.

So what we’re looking at is a quite dull euro so far this year with all the major market moves in EUR pairs a function of other currencies. It’s time to start looking for that situation to change. The problem with the Bollinger Bands is they don’t tell you which way the market is likely to go once the current consolidation is resolved. If it were just the case of looking at EUR/JPY and EUR/GBP from a technical perspective I’d be inclined to have a bullish bias as both are classic continuation set-ups.

EUR/AUD is problematic, though. That has the makings of a market due for at least a bit of a pull-back after the steep advance. On top of that, I shade the price pattern in EUR/USD as negative rather than positive. This muddled situation makes it a prime time for some kind of fake-out break-out. Regardless, patience is required. These narrow Band situations can persist for a while and certainly the summer holiday season is one which often (though certainly not always) leads to dull trading.

A recent article in the Atlantic has once again brought up the question as to whether the euro can survive (and generated a fair bit of discussion in the comment section). This is a debate that is on-going, of course. In fact, I was in the markets back when the single currency was launched and can say that even then there were a lot of people who didn’t expect it to last for any length of time (certainly not as long as it has done so far). That pessimism was part of what saw EUR/USD dive to near 0.8200 in the year 2000.

The Atlantic article brings up a common refrain in the arguments why the euro must eventually go away - namely the lack of an exchange rate adjustment mechanism to allow struggling economies like Greece to become more competitive through currency devaluation. Now in part that can come from a weaker euro. That hasn’t come against the USD to be sure.

The euro started life with an exchange rate to the dollar near 1.17, but since the market recovered from the initial decline it has only once dipped back below, and even then just fractionally and briefly. Despite all of the problems that have been well documented in the Eurozone since the Financial Crisis, the euro has remained quite strong against the greenback, albeit in a volatile fashion. Likewise for the pound.

There has been considerable euro devaluation against some currencies, however. The euro has really been beaten up against the commodity currencies such as the AUD and CAD. Given the strength in commodities in recent years, and the EZ issues, this is to be expected. The weakness of EUR/JPY is tied in to what many folks see as the inexplicable strength of the yen despite serious problems in the Japanese economy as well. And of course EUR/CHF got so weak because of flight to quality flows that the Swiss National Bank had to support the euro and put a floor under the cross. We have also seen declines in the likes of EUR/NOK and EUR/SEK, which are probably better reflective of exchange rates among real trading partners.

Unfortunately for those countries in the Euro Zone struggling, the weaker euro is only partially helpful. The Atlantic article observes that when excluding Germany a bit over half of all EZ trade is done within the zone. The weak euro has little impact on that fraction of trade, though it definitely helps the more externally export oriented countries (like Germany). Cyprus cannot become more price competitive to potential tourists from Europe because they do not have their own currency to depreciate.

Of course, as we have witnessed in the case of Japan, having your own currency doesn’t automatically mean you get the kind of devaluation you’d like to get to make your export goods more price competitive. The UK also struggled with a persistently strong(ish) pound when the Bank of England really wanted it to fall (though without actually saying so explicitly).

And not that currency devaluations are the quick fix some folks seem to think they are. It’s would be a very messy process in the case of a country exiting the euro – one that could actually make matters worse in the short-term. Just think about what would have to happen to all of the debts and obligations currently contracted in euro terms if a country like Greece exited the single currency. If a Greek company had a euro-denominated obligation and a new drachma devalued by 50% from where it came into the euro, it would be like that company’s obligation doubling!

But politics are very likely to be the major factor here.

There are considerable cost savings to being part of the EZ, not to mention a growing support infrastructure now. Plus, for countries like Germany who do considerable external export business, there is a major benefit to having a currency which is relatively weak. For these reasons and many others, there is going be a strong reluctance among the politicians to break up the euro. As a result, don’t look for it to happen any time soon. Even the expulsion of a single country presents problems as the ECB has repeatedly said there is no mechanism for doing so. Just imagine how long it would take to create that mechanism. Do you want to place bets on politicians moving with haste and expediency when all they have shown thus far is a proclivity for drawing things out?

This doesn’t mean one can’t bet against the euro from an exchange rate perspective. I just wouldn’t hold my breath waiting for the thing to come apart.

As a change of pace, I thought I’d use this post to do a little bit of market analysis looking at the market from a different perspective than the ones most often used. This type of analysis focuses more on time spent (or volume transacted) at certain levels rather than looking at simple progression of where it’s been over time as we generally see in bar and candlestick charts.

The chart below shows how EUR/USD has traded since February. Each of the clusters you see represents the distribution of trading over one month’s time. I won’t go too far into the details, but suffice it to say that the fatter a month’s distribution at a given price level, the more days the market traded at that prices, and the thinner the distribution the fewer days the market traded at that level. Think of it this way. If the market spends a lot of time at a price level it indicates agreed upon value in which both buyers and sellers are willing to transaction. Where the market doesn’t not spend much time it indicates rejection by one side or the other – value not agreed upon.

What we can see above is a trio of short, fat distributions for February, March, and April that indicate pretty narrow range trading. Then, in May, we have a long, thin distribution indicating a trend move lower. June was again mainly a consolidative month, but July started off with a trending action, then transitioned into more of a ranging set-up.

The July distribution indicates that things changed in EUR/USD near the beginning of the month and previously accepted value between about 1.2400 and 1.2700 suddenly became rejected. The market then move down to where valued was agreed upon below 1.2400.

Let’s put this in some common parlance. Think of the thin distribution of prices between 1.2350 and 1.2500 or so as a key resistance zone for EUR/USD. Selling interest far exceeded buying interest the last time the market moved through that zone. If the market can work back up there and hold the move it would tells us things have shifted and that buyers are starting to be more interested.

The concern I have, though, is that we don’t have as clear a rejection area to the downside to indicate a price level the sellers clearly found too low and/or where the buyers became much more aggressive. We have to go back to June 2010 to find the last time the market was down this low. Back then there was a final rejection near 1.1900. I think the risk, therefore, is that EUR/USD makes another move down to test those prior rejection lows.

The struggle, though, will be breaking away from the 1.2300 area. As the chart above shows, the market spent a lot of time around there in May/June of 2010. That makes it a significant attraction zone, which we’ve been seeing play out this month. If the market can start to develop more value below 1.2200, though, the odds for a run at 1.19 will increase.

There’s a bit more nuance to this type of market analysis, of course. If you find it interesting, you can learn more about it here.

Despite yesterday’s surge in investor confidence that provided Asian markets a boost, things appeared to have fallen a bit flat this morning. As reality set in that Spain’s bond yields have hit record-breaking highs and Greece’s electoral success might not be enough to negate prior monetary upset, investor’s optimism wasted no time in fizzling out.

Bloomberg reported early this morning a slip of 0.8 percent in Japan’s Nikkei 225 Stock Average, 0.1 in Hong Kong’s Hang Seng Index, and 0.7 in China’s Shanghai Composite Index. Tim Riordan of Australian hedge fund Parker Asset Management Ltd., elucidated how he sees European problems increasing, as opposed to reaching a resolution. With bond yields hitting 7.29 percent, Spain is becoming somewhat of the elephant in the room. Riordan states that this is could really be a red flag indicating a downward spiral should be reason for caution.

Borrowing costs of this caliber can be indicative of a country potentially in need of a bailout in the near future. Despite the notion of this possibility, European markets were able to rise Tuesday. Currently, the strongest fear amongst investors seems to be a contagion of Spain’s monetary battles over to Italy, who’s facing issues of its own.

A few weeks back I happened upon a very economically fitting Warren Buffett quote assuring American’s they needn’t fear a recession relapse lest things in Europe get out of control and leech into the US economy. If investors’ uneasiness over debt spilling across Europe is foreshadowing for imminent future fiscal events, will Buffett’s words prove true?

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

The events of this past weekend were pretty monumental for the world currency industry (and the world in general). Up until Greece’s Sunday elections, animosity regarding the stability of the euro in the event of a Greek exit had been running rampant amongst investors.

Now, with the results finally established, they were able to enjoy a brief moment of revelry in the electoral success of the pro-bailout New Democracy party.

An Article in The New York Times provides a good outline of what potentially could have happened to the euro had the leftist Syriza party won. Vowing to repudiate the country’s bailout agreement with the “troika” of the European Union, the European Central Bank, and the International Monetary Fund, this move would have siphoned financing of Greek banks. In turn, this would have rendered them unable to continue operating and eventually drop the euro and revert back to the drachma.

But alas, this was not the case, and so being within hours of the election, investors applauded the win by reorienting the falling euro in a much-needed upward direction. Unfortunately, the vivacity didn't carry into Monday market action. The euro fell flat once again as concerns regarding Spain’s astronomic bond yields crept back into investor’s psyches. With interest rates having breeched the 7 percent mark, these loans are being viewed as unsustainable.

But amongst the angst, some positivity prevails arriving in the form of Asian market success. Emerging Asian currencies gained as a result of investor’s newfound comfort in the pro-bailout results, enthusing them to add a few riskier assets. Overall, Asian markets experienced widespread lifts with the Japanese Nikkei index prevailing with a rise of almost 2 percent.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Today’s roster of top tier bulge banks holds some of the most colossal and well-known institutions in finance. JPMorgan Chase & Co., Deutsche Bank, Citigroup Inc., Morgan Stanley and Goldman Sachs; a few names that everyone’s heard, and almost everyone has an opinion about (usually in regards to their size). Of late, JPMorgan and Morgan Stanley have been receiving the majority of media flack with the whole $2B trade loss and Facebook equity underwriting investigation.

Though one bank has been doing a very good job at laying low for the past few months, and it wasn’t long ago that Goldman Sachs could hardly keep itself out of the news for more than five minutes. So one must wonder now, without the media blowing them up left and right, what has this large investment bank been up to?

A CNBC article answered this question by revealing that the bank has been doing a good job of being well, not so large. This fall, the firm is said to name less than 100 new partners; a group of higher ups at the firm that's shrinking steadily. After scrupulous vetting of these potential hires, the selected few are compensated handsomely (senior partner and CEO Blankfein pulled in an annual salary of $12 million in 2011) while gaining access to prestigious jobs at the firm. This alone would make one question why over the past year Goldman has seen a steady exodus of those employees fortunate enough to hold partner positions at the bank.

After reducing its total employee count by about 8 percent in the last year, as well as laying off about 50 last week, it’s clear that something is amiss with the firms growth pattern. As Goldman deflates as a whole in size, the heft of its partnership base usually lessens in congruence.

So where is this drastic size reduction coming from? Greece.

A few weeks ago, I wrote a post about how a potential Greek euro exit would likely affect the US. One of the main concerns was that it could set in motion a widespread panic amongst investors, who would then impulsively retract their allocated capital. Today, a Bloomberg article showed evidence of this theory starting to make its presence known.

The piece provided insight about how European turmoil is directly correlated to success amongst the investment banking industry. More specifically, the article looks at Greece and their potential abandonment of the euro for a return back to the drachma.

A Goldman analyst showed last week that for a third year straight, revenue from investment banking and trading is in danger of dropping at least 30 percent from the first quarter. The deadly combination of deal volume slowing, wider credit spreads, heightened volatility, and equity and credit markets falling, can all be traced back to fears of a Greek euro exit, followed by the spread of the European sovereign-debt crisis. These ingredients are the direct result of investors putting themselves into a defensive monetary state over the aforementioned euro woes.

This tension is taking its toll on the paychecks of investment bank employees, as 11 analysts reduced earnings estimates for the New York based Goldman Sachs in the past four weeks. The question now is whether these declines are cyclical, or indicative of a general phasing out of the investment banking industry. Boston Consulting Group, Inc. stated in late April that banks of this kind will see very little revenue growth during the next few years and will be forced to cut up to 30 percent of their managers.

Jamie Dimon and Lloyed C. Blankfein, CEOs of JPMorgan and Goldman Sachs respectively, are in adamant agreeance that this is, of course, is nothing more than a phase and the industry will undoubtedly bounce back. David Konrad, an analyst at KBW Inc. in New York, gives a bit of hope to the fighting back of these banks by pointing out that due to their large amounts of capital and strong liquidity, any program coming out of Europe that the market responds positively to will inevitably have a bold impact on valuations. He recalls how stocks have been known to jump up to 30 percent on just a bit of breathing room.

So could all of this drastic shrinking represent the end of the age where grand investment banks rule the financial industry?  Or is it in fact no more than a shock absorption effect occurring as they bend to accommodate European turmoil? As we all know, yes, they are big. But are they really too big to fail?

 

 

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Our Two Cents – Week of 5/29/12

Summer has arrived. After last weekend’s gorgeous weather in Boston as we honored Memorial Day, we erased our cravings for hamburgers and hot dogs and replaced them with hunger for some knowledge of the currency markets.

In the U.S., economic optimism continued. The May Thomson Reuters/University of Michigan’s index on consumer sentiment rose to its highest level in four years. According to the survey, consumer sentiment increased to 79.3 from 76.4 in April. The highest jump since October 2007, the survey also showed half of all consumers felt the economy has improved during the last year. Jobless claims, which remained at 370,000, also illustrated economic stability.

While conditions in America painted an optimistic picture, images abroad weren’t cast in the same stroke. Greece remained much of the focal point as the country devised plans for a parallel currency to the euro, should it withdraw from the region. Sergey Shvestov, vice president of Russia’s Central Bank, said Greece’s departure from the eurozone was necessary, and it would be a “good example” for other countries. Facing discussions about debt issuances, German Chancellor Angela Merkel defended her opposition about why bonds won’t solve the eurozone’s problems, saying such tools wouldn’t get to the root of the problem. Ultimately, the Organization for Economic Cooperation and Development warned the 17-member region that a severe recession looms if its governments and central banks don’t act quickly to improve economic conditions.

For hedge funds, an overwhelmingly majority of them added compliance staff since 2008, according to a new survey. Hedge fund redemptions for May 2012 upped 3.31 percent, according to the GlobeOp Forward Redemption Indicator.

 

 

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

An article on CNNMoney about Greece’s pending decision on exiting the euro (or the “Grexit," as it is called) brought up a very good question: why isn’t more attention being paid to what the country’s choice will mean for the US? The clock certainly has not stopped ticking and the election that will likely make or break the country’s euro membership is set to take place next month.

Well, the good news is that in terms of trade, the US economy will hardly feel the tremors produced by the potential Grexit threat, should it materialize. Only a meager 0.1% of American exports go to Greece, with 14% going to the euro zone in general. If Europe is shaken by their decision, US trade should come out relatively unscathed.

The place of worry with this situation is actually a bit more speculative. Economists fear that should a Grexit occur, it could trigger big time panic amongst investors, who will then make mad dash bank runs, which in turn will further disrupt the Euro that includes bigger debt-laden countries. How’s that for looming dark cloud syndrome?

With over 20% of all loans that happen in the US coming from European banks, a debt selloff could potentially hinder their willingness to lend. Though US banks have been actively reducing their exposure to peripheral euro zone countries, a great deal more exposure to the wider euro zone in general still remains.

Does this mean the US should really start focusing on a contingency plan should Greece decide to return to the drachma?

 

View the full article here.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.